Current issues

1) Cryptocurrency
Cryptocurrencies are virtual currencies that provide the holder with
various rights. They are not issued by a central authority and so exist
outside of governmental control. Cryptocurrencies, such as the
Bitcoin, can be used to purchase some goods and services although
they are not yet widely accepted.
The market value is extremely volatile and some investors make high
returns through short-term trade. The accounting treatment of
cryptocurrency is not clear cut.
Cryptocurrencies do not constitute ‘cash’ because they cannot be
readily exchanged for goods and services. Moreover, they do not
qualify as a ‘cash equivalent’ (in accordance with IAS 7 Statement of
Cash Flows) because they are subject to a significant risk of a change
in value.
An investment in cryptocurrency does not represent an investment in
the equity of another entity or a contractual right to receive cash, and
so does not meet the definition of a financial asset as per IAS 32
Financial Instruments: Presentation.
The most applicable accounting standard would appear to be IAS 38
Intangible Assets because cryptocurrency is an identifiable non-
monetary asset without physical substance.
Although cryptocurrencies most likely fall within the scope of IAS 38,
the measurement models in that standard do not seem appropriate.
The fair value of cryptocurrency is volatile so a cost based measure is
unlikely to provide relevant information. The revaluation model in IAS
38 initially seems more appropriate, but this requires gains on
remeasurement to fair value to be presented in other comprehensive
income. Many entities invest in cryptocurrencies to benefit from

Fintram Global | Ph: +91 8882677955 | [Link]

Page 1 of 32
short-term changes in fair value and gains or losses on short-term
investments are normally recorded in profit or loss (e.g. assets inside
the scope of IFRS 9 Financial Instruments).
As can be seen, the accounting treatment of cryptocurrencies is not
straight-forward. In the absence of an appropriate accounting
standard, preparers of financial statements should refer to the
principles in existing IFRS Standards as well as the Conceptual
Framework in order to develop an accounting policy.

Fintram Global | Ph: +91 8882677955 | [Link]

Page 2 of 32
2) Climate Change
Climate change is impacting both society and companies alike.
Corporations are responding to its impact, and one of the reasons is
that investors are demanding actions. Investors need to know how a
company is considering the impact of climate change on its business
model, risk strategy, and also the effect on its financial statements.
Investors want to understand the future challenges that the company
faces, and what the company’s plans are to deal with these challenges.

The Paris Agreement (United Nations) is a legally binding international

treaty on climate change which will require a significant reallocation
of company resources if the agreed goals are to be met. Therefore,
companies could be exposed to a wide range of risks and
opportunities as they aim to meet these goals. Companies will need
to disclose the financial implications of climate-related challenges that
face them.

An increasing number of companies are providing narrative reporting

on climate-related issues. Where minimum legal requirements are
being met, investors are calling for additional disclosure to inform
their decision making. Some companies have set strategic goals such
as ‘net zero’ (or carbon neutral), but it is often unclear from their
reporting how progress towards these goals will be achieved,
monitored or assured. Climate-related narrative reporting
requirements and expectations cover both the potential impact on the
future of a business and the company’s impact on the environment.

As the demand for climate-related disclosure by investors and other

stakeholders increases, many companies are developing their climate
governance in line with reporting frameworks, principally ‘The Task
Force on Climate-related Financial Disclosures’ (TFCD).

Some of the information that investors may require is set out below:

Fintram Global | Ph: +91 8882677955 | [Link]

Page 3 of 32
• the arrangements in place and strategy for assessing and considering
climate-related issues
• the metrics used to monitor climate-related goals and targets
• the opportunities and risks concerning climate-related issues which
are most relevant and material to the company’s business model and
strategy
• the potential effects on the company’s profitability, net assets,
products, customers, suppliers etc of different climate scenarios
• are the risks and opportunities reflected in the financial statements,
for example the effect of assumptions used in impairment testing,
depreciation rates, decommissioning etc
• the assessment of the company’s viability over the longer-term taking
into account climate-related issues
• the viability of the company’s business and business model.

Climate change and International Financial Reporting Standards

(IFRS® standards)

There is no single IFRS standard which addresses climate change.

However, IFRS standards provide a framework for incorporating the
risks of climate change into companies’ financial reporting. Companies
must consider climate-related matters when the effect is material on
the financial statements.

IAS® 1, Presentation of Financial Statements

IAS 1 requires disclosure of information not specifically required by

IFRS standards and not presented elsewhere in the financial
statements, but that is relevant to an understanding of the financial
statements. In addition, IAS 1 requires a company to consider whether
any material information is missing from its financial statements such
as the impact of climate-related matters on the company’s financial
position and performance.

Disclosure of assumptions about climate-related matters may be

required, where assumptions have been affected by climate change.

Fintram Global | Ph: +91 8882677955 | [Link]

Page 4 of 32
For example, estimates of future cash flows for impairment testing
purposes or the calculation of decommissioning obligations. The
disclosure may include the nature of the assumptions or the sensitivity
of the calculations.

In addition, IAS 1 requires disclosure of the judgements that have a

significant effect on the amounts recognised in the financial
statements.

IAS 1 requires management to assess a company’s ability to continue

as a going concern. Climate-related matters may create material
uncertainties that cast significant doubt upon a company’s ability to
continue as a going concern. IAS 1 requires disclosure of those
uncertainties.

IAS 2, Inventory

Climate-related matters may cause a company’s inventories to

become obsolete, or the value to decline or costs of completion to
increase. IAS 2 requires inventories to be valued at the lower of cost
and net realisable value (NRV). NRV is the estimated selling price in
the ordinary course of business, less the estimated cost of completion
and the estimated costs necessary to make the sale. Estimates of NRV
will be based on the most reliable evidence available of the amount
which the inventories are expected to realise.

IAS 12, Income Taxes

IAS 12 requires companies to recognise deferred tax assets for

deductible temporary differences and unused tax losses and credits,
to the extent it is probable that future taxable profit will be available
against which those amounts can be utilised. Climate-related matters
may affect a company’s estimate of future taxable profits which may
result in potential deferred tax assets not being recognised or the
derecognition of already recognised deferred tax assets.

Fintram Global | Ph: +91 8882677955 | [Link]

Page 5 of 32
IAS 16, Property, Plant and Equipment

IAS 16 requires companies to review the residual value and the useful
life of an asset at least at each financial year end and, if expectations
differ from previous estimates, any change should be accounted for
prospectively as a change in estimate. Climate-related matters may
affect the estimated residual value and expected useful lives of assets
because of obsolescence or legal restrictions on their use.

IAS 36, Impairment of Assets

Climate-related matters may give rise to an indication that assets are

impaired. A decline in demand for products that are not
environmentally friendly could indicate impairment of that product or
the manufacturing unit making the product. An adverse change in the
business environment of a company is an indication of impairment.

In assessing value in use, a company is required to calculate cash flow

projections based upon reasonable and supportable assumptions that
are the best estimate of the future economic conditions. Thus,
companies will need to consider whether climate-related matters
affect those assumptions.

Companies are required to disclosure the events, circumstances and

assumptions that led to the recognition of an impairment loss, which
could include climate-related events.

IAS 37, Provisions, Contingent Liabilities and Contingent Assets

Climate-related matters may affect the recognition, measurement

and disclosure of liabilities related to such things as penalties imposed
by governments for not meeting climate-related targets or causing
environmental damage. In addition, contracts may become onerous
due to a change in inventory purchasing strategy or redesign of
products.

Fintram Global | Ph: +91 8882677955 | [Link]

Page 6 of 32
Companies should disclose major assumptions about any future
events that have affected a provision or contingent liability.

IFRS 9, Financial Instruments

Climate-related matters may affect a lender’s exposure to credit

losses, caused by environmental disasters or regulatory change, and
also a borrower’s ability to meet its debt obligations to the lender.
Climate-related matters may, therefore, affect the calculation of
expected credit losses if there is an impact on the different potential
future economic scenarios or the assessment of a significant increase
in credit risk.

The classification and measurement of loans may be affected as

lenders may include terms linking contractual cash flows to an entity’s
achievement of climate-related targets. The lender would need to
assess whether the contractual terms of the financial asset give rise to
cash flows that are solely payments of principal and interest on the
principal amount outstanding. Additionally, climate-related targets
may create an embedded derivative that needs to be separated from
the host contract.

Climate change may reduce the probability of a hedged forecast

transaction occurring or affect its timing. In this case, the hedge
accounting relationship may need to be terminated or there may be
hedge ineffectiveness. Similarly, a reduction in the volume of highly
probable forecast transactions may lead to partial termination under
IFRS 9.

IFRS 13, Fair Value Measurement (FVM)

When making the critical assessments and judgements for measuring

fair value, the entity should consider what conditions and the
corresponding assumptions were known or knowable to market
participants. The impact of climate change on FVM would depend on

Fintram Global | Ph: +91 8882677955 | [Link]

Page 7 of 32
the evaluation of whether the climate change would have impacted
market participants’ valuation assumptions at the reporting date.

The information such as climate-related legislation available to the

market at the reporting date may be relevant in making this
evaluation. This would include any corroborative or contrary evidence
such as the timing and trajectory of observable market price
movements of related assets in the relevant markets, as well as
information from other sources of market data up to the reporting
date.

Depending on the facts and circumstances of each case, disclosure

may be needed to enable users to understand whether or not climate
change has been considered for the purpose of FVM. Users should
understand the basis for selecting the assumptions and inputs that
were used in the FVM and the related sensitivities.

The above examples from IFRS standards are not exclusive but are
indicative of the far-reaching impact climate change will have on
business reporting. This area of business reporting is evolving as the
investor, and wider stakeholder, demand for both financial and non-
financial disclosures increases generally.

Fintram Global | Ph: +91 8882677955 | [Link]

Page 8 of 32
3)Accounting policies
The accounting treatment
In accordance with IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors, an entity should only change an accounting
policy if:
• required by an IFRS Standard, or
• results in more reliable and relevant information for financial
statement users.
When a change is required by an IFRS Standard, then the standard
normally specifies transitional provisions. When the change is not
required by an IFRS Standard then it is implemented retrospectively,
unless it is impractical to do so.
In contrast, a change in accounting estimate is dealt with
prospectively. Unlike with a change in policy, this will impact the
statement of profit or loss in the current year only.

The problem
Calculating the prior year impact of accounting policy changes is a
costly and time consuming process. The Board is concerned that
retrospective application dissuades entities from voluntarily changing
accounting policies, even though the change would benefit financial
statement users.
The Board is particularly concerned about changes in policy that arise
as a result of agenda decisions made by the IFRS Interpretations
Committee.
As a result of an agenda decision, an entity may wish to change an
accounting policy but be deterred by the time and cost involved in
retrospective application.

Fintram Global | Ph: +91 8882677955 | [Link]

Page 9 of 32
The Proposal
The Board has issued an Exposure Draft ED/2018/1 Accounting Policy
Changes. In this the Board proposes that an accounting policy change
resulting from an agenda decision should be implemented
retrospectively unless:
• it is impracticable to do so (due to a lack of data), or
• the cost of working out the effect of the change exceeds the
benefits to the users of the financial statements.
When considering the benefits to users of retrospective application,
the Board proposes that entities consider:
• the magnitude of the change
• the pervasiveness of the change across the financial statements
• the effect on trend information.

Fintram Global | Ph: +91 8882677955 | [Link]

Page 10 of 32
4)Management commentary
Purpose of Management Commentary
The IFRS Practice Statement Management Commentary provides a
framework for the preparation and presentation of management
commentary on a set of financial statements.
Management commentary provides users with more context through
which to interpret the financial position, financial performance and
cash flows of an entity.
It is not mandatory for entities to produce a management
commentary.

Framework for presentation of management commentary

The purpose of a management commentary is:
• to provide management’s assessment of the entity’s
performance, position and progress
• to supplement information presented in the financial
statements, and
• to explain the factors that might impact performance and
position in the future.
This means that the management commentary should include
information which is forward-looking.
Information included in management commentary should possess the
qualitative characteristics of useful information.

Fintram Global | Ph: +91 8882677955 | [Link]

Page 11 of 32
Elements of management commentary
Management commentary should include information that is
essential to an understanding of:
• the nature of the business
• management’s objectives and strategies
• the entity’s resources, risks and relationships
• the key performance measures that management use to
evaluate the entity’s performance.

Fintram Global | Ph: +91 8882677955 | [Link]

Page 12 of 32
5)Debt and Equity
The problem with debt and equity
The distinction between financial liabilities and equity, as outlined in
IAS 32 Financial Instruments: Presentation is important. Not only are
liabilities perceived as riskier than equity, but changes in the carrying
amount of a liability impact profit or loss. However, the application of
IAS 32 has posed problems.
In accordance with IAS 32, a contract that obliges an entity to deliver
a variable number of its own shares is classified as a financial liability.
However, there is no clear rationale for why this is the case. Moreover,
a contract that obliges an entity to deliver a variable number of its own
shares does not appear to meet the definition of a liability in the
Conceptual Framework.
The lack of rationale has resulted in diversity in practice when entities
account for instruments that are not explicitly covered by IAS 32 –
such as put options on a non-controlling interest.
The Board have published a discussion paper on the topic of debt and
equity. In this, the Board outlines its initial proposals for accounting
standard amendments and requests comments from interested
parties.
Proposals
The Board propose that a financial instrument should be classified as
a liability if it exhibits one of the following characteristics:
• ‘An unavoidable contractual obligation to transfer cash or
another financial asset at a specified time other than liquidation
• An unavoidable contractual obligation for an amount
independent of the entity’s available economic resources’
(DP/2018/1: IN10)

Fintram Global | Ph: +91 8882677955 | [Link]

Page 13 of 32
Impact of proposals
For many financial instruments, these proposals would not impact
their classification or measurement.
A bond that pays 5% interest per year
There is a contractual obligation to transfer cash each year.
Moreover, the amount payable is independent of the entity’s available
resources, because the entity may not have sufficient liquid assets to
settle.
Under the proposals, the accounting treatment of the bond would not
change. It would be classified as a financial liability.
Ordinary shares
There is no contractual obligation to transfer cash other than at
liquidation (because dividends and redemption are at the entity’s
discretion)
At liquidation, any amounts transferred to shareholders are restricted
to the entity’s remaining resources.
As such, under the proposals, ordinary shares would still be classified
as equity.
An obligation to issue shares worth $30 million in 5 years’ time.
There is no contractual obligation to transfer cash or another financial
asset
However, there is an unavoidable obligation to transfer an amount
independent of the entity’s available resources. Although the entity’s
shares may have minimal value in 5 years’ time, the obligation to
transfer shares worth $30 million remains and the entity must fulfil it.
As such, under the proposals, this type of contract would still be
classified as a financial liability.

Fintram Global | Ph: +91 8882677955 | [Link]

Page 14 of 32
Irredeemable fixed-rate cumulative preference shares
Assume that the terms of these shares state that unpaid dividends
accumulate. Unpaid dividends are payable at the entity’s discretion or
on liquidation.
There is no contractual obligation to transfer cash except at
liquidation.
However, the amount payable on liquidation is independent of the
entity’s available resources. This is because the dividends accumulate
over-time. At liquidation, the entity may have insufficient resources to
pay these accumulated dividends.
In accordance with IAS 32, this financial instrument is classified as
equity. However, under the new proposals, it would be classified as a
financial liability.

Convertible bonds
Under the Board’s proposals, the accounting treatment of a
convertible bond where the holder can choose redemption in the
form of cash or a fixed number of the entity’s own equity shares would
not change. In other words, the issuer of the bond would continue to
split the instrument into a liability component and an equity
component.

Fintram Global | Ph: +91 8882677955 | [Link]

Page 15 of 32
6)Deferred Tax
The recognition exemption
As noted in the earlier session, IAS 12 Income Taxes prohibits the
recognition of deferred tax if the temporary difference arises from a
transaction that is not a business combination and affects neither
accounting profit nor taxable profit.
Leases and the recognition exemption
IFRS 16 Leases requires lessees to recognise a right-of-use asset and a
lease liability for all leases, unless the lease is short-term or of minimal
value.
Assume that an entity enters into a lease agreement and that the
present value of the payments to be made is $4 million. It would post
the following double entry:
Dr Right-of-use asset $4m
Cr Lease Liability $4m
The tax base of the right-of-use asset and lease liability depend on tax
law within the jurisdiction:
If the tax deduction received is in respect of the leased asset then:
• the right-of use asset has a tax base of $4 million (the future
allowable tax deduction)
• the lease liability has a tax base of $4 million (carrying amount
less any amount that will be deductible for tax purposes in future
periods - i.e. $4m – nil).
No temporary difference arises on initial recognition of the
transaction and so no deferred tax is accounted for. Deferred tax will
be recognised subsequently if temporary differences arise.

Fintram Global | Ph: +91 8882677955 | [Link]

Page 16 of 32
If the tax deduction received is in respect of the lease liability then:
• the right-of use asset has a tax base of nil (the future allowable
tax deduction)
• the lease liability has a tax base of nil (carrying amount less any
amount that will be deductible for tax purposes in future periods
- i.e. $4m – $4m).
Temporary differences arise because the right-of-use asset and lease
liability are both initially carried at $4 million. However, in accordance
with IAS 12 Income Taxes, no deferred tax is recognised on this
transaction either initially or subsequently because the transaction
affects neither accounting profit nor taxable profit at initial
recognition. This means that the entity’s financial statements would
show the tax impact of the lease as tax deductions are made available
(potentially based on lease payments) rather than as the leased asset
and liability are recovered and settled. This would lead to a difference
between the entity’s effective tax rate and the tax rate for the
transaction in its jurisdiction.
Proposals
As a result of the above, the Board wish to revise IAS 12 and have
published Exposure Draft ED/2019/5 Deferred Tax related to Assets
and Liabilities arising from a Single Transaction.
If a transaction is not a business combination and affects neither
accounting nor taxable profit but equal amounts of deductible and
taxable differences are created, then the Board are proposing that:
• A deferred tax asset is recognised in relation to the deductible
temporary differences to the extent that future profits will be
available against which the difference can be utilised
• A deferred tax liability is recognised for the taxable temporary
difference but must not exceed the amount of deferred tax asset
recognised above.

Fintram Global | Ph: +91 8882677955 | [Link]

Page 17 of 32
Additional lease payments
Lease payments made in advance or initial direct costs incurred by the
lessee are added to the carrying amount of the right-of-use asset. This
would mean that taxable and deductible temporary differences
associated with the lease do not offset. The Board have therefore
clarified that temporary differences arising from payments in advance
or initial direct costs are assessed separately from any equal and
offsetting temporary differences arising from the underlying lease
transaction.

Fintram Global | Ph: +91 8882677955 | [Link]

Page 18 of 32
7)Natural disasters
Natural disasters include volcanic eruptions, earthquakes, droughts,
tsunamis, floods and hurricanes. Many of these have become more
prevalent, most likely as a result of climate change. Natural disasters
devastate communities, and the process of recovery can last for years.
Companies that operate in areas effected by natural disasters will also
have to consider the financial reporting consequences. Some of these
are considered below.
Impairments
• A natural disaster is likely to trigger an impairment review –
particularly in relation to property, plant and equipment (PPE).
This is because, in accordance with IAS 36 Impairment of Assets,
there are likely to be indicators of impairment.
• This may be because individual assets are damaged, or it may be
because the economic consequences of the disaster trigger a
decline in customer demand. If PPE is destroyed, then it should
be derecognised rather than impaired.
In line with IFRS 9 Financial Instruments, entities that lend money will
need to assess whether credit risk associated with the financial asset
has increased significantly. A natural disaster is likely to lead to a
higher default rate, so some financial assets will become credit-
impaired.
Natural disasters may lead to inventory damage. Alternatively, the
economic consequences of the disaster may mean that inventory
must be sold at a reduced price. As per IAS 2 Inventories, some
inventory may need to be remeasured from its cost to its net realisable
value.
Insurance
It is likely that entities affected by natural disasters will need to
account for insurance claims. This can be a difficult area because of

Fintram Global | Ph: +91 8882677955 | [Link]

Page 19 of 32
uncertainty regarding the nature of the claim, the type of coverage
provided by the insurance, and the timing and amount of any
proceeds recoverable.
IAS 37 Provisions, Contingent Liabilities and Contingent Assets only
allows the recognition of an asset from an insurance claim if receipt is
virtually certain. This is a high threshold of probability and so
recognition is unlikely. However, if an insurance pay-out is deemed
probable then a contingent asset can be disclosed.

Additional liabilities
As a result of a natural disaster, an entity may decide sell or terminate
a line of business, or to save costs by reducing employee headcount.
In accordance with IAS 37, a provision will be recognised if there is a
present obligation from a past event and an outflow of economic
benefits is probable. An obligation only exists if a restructuring plan
has been implemented or if a detailed plan has been publicly
announced. When measuring the provision, only the direct costs from
the restructuring, such as employee redundancies, should be
included.
Provisions may be required if there is an obligation to repair
environmental damage. Moreover, decommissioning provisions
(when an entity is obliged to decommission an asset at the end of its
life and restore the land) will require review because the natural
disaster may alter the timing or amount of the required cash flows.

Going concern
Natural disasters will lead to changes in the economic environment,
as well as business interruption and additional costs. If there are
material uncertainties relating to going concern, then these must be
disclosed in accordance with IAS 1 Presentation of Financial

Fintram Global | Ph: +91 8882677955 | [Link]

Page 20 of 32
Statements. If the going concern assumption is not appropriate then
the financial statements must be prepared on an alternative basis and
this fact must be disclosed.

Fintram Global | Ph: +91 8882677955 | [Link]

Page 21 of 32
8)Defined benefit plan amendments, curtailments and settlements
The problem
If there is a plan amendment, settlement or curtailment (PASC) then
the effect of this is calculated by comparing the net defined benefit
deficit before and after the event.
Even though the reporting entity remeasures the defined benefit
deficit in the event of a PASC, IAS 19 did not previously require the use
of updated assumptions to determine current service cost and net
interest for the period after the PASC.
The Board argued that ignoring updated assumptions is inappropriate,
because these are likely to provide a more faithful representation of
the impact of the entity’s defined benefit pension plan during the
reporting period.

Amendments
The Board amended IAS 19 to clarify that the reporting entity must
determine:
• the current service cost for the remainder of the reporting
period after the PASC using the actuarial assumptions used to
remeasure the net defined benefit liability
• net interest for the remainder of the reporting period after the
PASC using the remeasured defined benefit deficit and the
discount rate used to remeasure the defined benefit deficit.

Fintram Global | Ph: +91 8882677955 | [Link]

Page 22 of 32
9)Materiality
Materiality as a concept is used widely in financial reporting. However,
the Board accepts that further guidance is needed on how to apply it
to the preparation and interpretation of financial statements.
The Practice Statement
The Board have issued a Practice Statement called Making Materiality
Judgements. This provides non-mandatory guidance that may help
preparers of financial statements when applying IFRS Standards.
The key contents of the Practice Statement are summarised below.
Definitions and objectives
The current definition of materiality is that an item is material if its
omission or misstatement would influence the economic decisions of
financial statement users.
The Board are proposing to expand this definition to say that an item
is also material if obscuring it would influence the economic decisions
of financial statement users.
The objective of financial statements is to provide useful information
about the reporting entity to existing and potential investors, lenders
and other creditors to help them make decisions about providing
resources to that entity. This requires that the preparers of the
financial information make materiality judgements.
When assessing whether information is material, an entity should
consider:
• Quantitative factors – measures of revenue, profit, assets, and
cash flows
• Qualitative factors – related party transactions, unusual
transactions, geography, and wider economic uncertainty.

Fintram Global | Ph: +91 8882677955 | [Link]

Page 23 of 32
Materiality judgements are relevant to recognition, measurement,
presentation and disclosure decisions.
Recognition and measurement
An entity only needs to apply the recognition and measurement
criteria in an IFRS Standard when the effects are material.
Presentation and disclosure
An entity only needs to apply the disclosure requirements in an IFRS
Standard if the resulting information is material.
The entity may need to provide additional information, not required
by an IFRS Standard, if necessary to help financial statement users
understand the financial impact of its transactions during the period.

When organising information, entities should:

• Emphasise material matters
• Ensure material information is not obscured by immaterial
information
• Ensure information is entity-specific
• Aim for simplicity and conciseness without omitting material
detail
• Ensure formats are appropriate and understandable (e.g. tables,
lists, narrative)
• Provide comparable information
• Avoid duplication.

Fintram Global | Ph: +91 8882677955 | [Link]

Page 24 of 32
Users
Materiality judgements must be based on the needs of the primary
users of financial statements.
The primary users are current and potential investors, lenders and
creditors.
Process
The Board recommends a systematic process when making materiality
judgements:
• Step 1 : Identify information that could be material
• Step 2 : Assess whether that information is material by size and
nature
• Step 3 : Organise the information in draft financial statements –
should be clear and concise
• Step 4 : Review the draft financial statements

Disclosure of accounting policies

In the Exposure Draft ED 2019/6 Disclosure of Accounting Policies, the
Board has proposed amendments to IAS 1 Presentation of Financial
Statements and the Practice Statement Making Materiality
Judgements in order to help preparers of financial statements apply
the concept of materiality to accounting policy disclosures.

Terminology
IAS 1 currently requires entities to disclose ‘significant accounting
policies’. The Board propose to amend this to ‘material accounting
policies’.
The Board wish to clarify that a disclosure of an accounting policy is
material if, when taken with the information in the rest of the financial

Fintram Global | Ph: +91 8882677955 | [Link]

Page 25 of 32
statements, it could influence the economic decisions of the financial
statement users.
Accounting policies relating to immaterial transactions do not need to
be disclosed.
Guidance
Not all accounting policies relating to material transactions are, in
themselves, material.
The Board note that an accounting policy is likely to be material to the
financial statements if it relates to a material transaction and:
• was changed during the period
• was chosen from one or more alternatives
• was developed in the absence of an IFRS Standard that explicitly
applies
• relates to an area where the entity has to make significant
judgements or assumptions
• applies the requirements of an IFRS Standard in a way that is
entity specific.

Fintram Global | Ph: +91 8882677955 | [Link]

Page 26 of 32
[Link] Concern

An entity prepares financial statements on a going concern basis when, under

the going concern assumption, the entity is viewed as continuing in business for
the foreseeable future. The term ‘foreseeable future’ is not defined within ISA
570, but IAS 1®, Presentation of Financial Statements deems the foreseeable
future to be a period of at least 12 months from the end of the reporting period.
The concept of going concern is an underlying assumption in the preparation of
financial statements, hence it is assumed that the entity has neither the
intention, nor the need, to liquidate or curtail materially the scale of its
operations. If management conclude that the entity has no alternative but to
liquidate or curtail materially the scale of its operations, the going concern basis
cannot be used and the financial statements must be prepared on a different
basis (such as the ‘break-up’ basis).

Management’s responsibility
The concept of going concern is particularly relevant in times of economic
difficulties and in some situations management may determine that a profitable
company may not be a going concern, for example because of significant cash
flow difficulties. It is important that candidates understand that it is the
responsibility of management to make an assessment of whether the use of the
going concern basis of accounting is appropriate, or not, when they are
preparing the financial statements.
In order to conclude as to whether, or not, an entity is able to continue in
business for the foreseeable future, management will have to make judgments
on various uncertain future outcomes of events or conditions. ISA 570 outlines
three factors that are relevant and which management must take into
consideration when determining whether, or not, an entity can prepare the
financial statements on the going concern basis:
• The degree of uncertainty associated with the outcome of an event or
condition increases significantly the further into the future an event or
condition or the outcome occurs. For that reason, most financial
reporting frameworks that require an explicit management assessment
specify the period for which management is required to take into
account all available information.

Fintram Global | Ph: +91 8882677955 | [Link]

Page 27 of 32
 • The size and complexity of the entity, the nature and condition of its
business and the degree to which it is affected by external factors affect
the judgment regarding the outcome of events or conditions.

• Any judgment about the future is based on information available at the

time at which the judgment is made. Subsequent events may result in
outcomes that are inconsistent with judgments that were reasonable at
the time they were made.

Auditor’s responsibilities
It is not the auditor’s responsibility to determine whether, or not, an entity can
prepare its financial statements using the going concern basis of accounting; this
is the responsibility of management. The auditor’s responsibility under ISA 570
is to obtain sufficient appropriate audit evidence about the appropriateness of
management’s use of the going concern basis of accounting in the preparation
of the financial statements, and to conclude whether there is a material
uncertainty about the entity’s ability to continue as a going concern.
There are three situations that ISA 570 identifies in terms of the use of the going
concern basis of accounting:
• use of the going concern assumption is appropriate but a material
uncertainty exists
• use of the going concern assumption is inappropriate
• management unwilling to make or extend its assessment.
Use of the going concern assumption is appropriate but a material uncertainty
exists
A reporting entity that considers the going concern basis of accounting to be
appropriate, but still has a material uncertainty present will have to make
disclosure of the fact in the financial statements that there are uncertain future
transactions/events that may result in the entity being unable to continue in
business in the foreseeable future.

Fintram Global | Ph: +91 8882677955 | [Link]

Page 28 of 32
Additional procedures
If the preliminary assessment or evaluation of management's assessment has
identified events or conditions that may cast significant doubt on the entity's
ability to continue as a going concern, the auditor shall perform further audit
procedures to establish whether a material uncertainty about going concern
exists.
The procedures will include reviewing management's plans for future actions for
going concern, including, for example, enquiries about its plans to liquidate
assets, borrow money or restructure debts, reduce or delay expenditures, or
increase capital, to establish whether they are feasible and likely to improve the
situation.
Also, if the entity has prepared cashflow forecasts and their consideration is
critical to management plans for going concern, the auditor shall evaluate the
reliability of the underlying data used in the forecasts and determine whether
the assumptions underlying the forecast can be adequately supported by
evidence. That could be done by comparing forecasts for recent previous
periods and the current period with actual results.
Where management's assumptions include continued financial support by third
parties and such support is important to the ability of the entity to continue as
a going concern, the auditor may need to request written confirmations from
those third parties and to obtain evidence about their ability to provide such
support.
Written representations from management and directors regarding their future
action plans and their feasibility also need to be obtained by the auditor.

Fintram Global | Ph: +91 8882677955 | [Link]

Page 29 of 32
[Link] Reporting
Through sustainability reporting, companies communicate their performance
and impacts on a wide range of sustainability topics, spanning environmental,
social and governance parameters. It enables companies to be more transparent
about the risks and opportunities they face, giving stakeholders greater insight
into performance beyond the bottom line.
In April 2021, the IFRS Foundation published two documents in relation to their
project on sustainability reporting. The first summarises the significant matters
raised by respondents to their Consultation Paper on Sustainability Reporting.
The second document was an Exposure Draft with proposed targeted
amendments to the IFRS Foundation Constitution to accommodate an
International Sustainability Standards Board (ISSB). This would allow the ISSB to
set IFRS sustainability standards.
The IFRS Foundation reviewed the feedback on their Consultation Paper on
Sustainability Reporting and set out a strategy that proposed the creation of a
new board, the ISSB, under the Foundation’s current governance structure. The
IFRS Foundation reached the following conclusions:
• the new board would focus on information that is material to the
decisions of investors and other participants in the world’s capital markets
• the new board would initially focus on climate-related reporting while
also moving quickly to work towards meeting the information needs of
investors on other environmental, social and governance (ESG) matters
• the new board would build on the well-established work of the Financial
Stability Board’s Task Force on Climate-related Financial Disclosures
(TCFD), as well as work by the alliance of leading standard-setters in
sustainability and integrated reporting focused on enterprise value
• by working with standard-setters from key jurisdictions, standards issued
by the new board would provide a globally consistent and comparable
sustainability reporting framework.
There is broad stakeholder support for globally recognised sustainability
reporting standards. Currently it can be argued that there are diverse
approaches to and objectives for sustainability standard-setting which could
result in increasing global fragmentation. This demonstrates the need to

Fintram Global | Ph: +91 8882677955 | [Link]

Page 30 of 32
promote comparable reporting and reduce the complexity in approaches and
objectives.
A set of comparable and consistent standards would allow companies to create
public trust through greater transparency of their sustainability initiatives, which
would be helpful to investors. Investors require better disclosure of such
information as climate risks and sustainability indicators.
The objective of the ISSB would be to develop and maintain a global set of
sustainability reporting standards. Such standard setting could make use of
existing sustainability frameworks and standards. The development of a
framework for sustainability reporting could be coherent with IFRS standards
and the IASB’s mission to serve investors and primary users of financial
statements. The ISSB could adapt the existing standard setting process and use
the experience of the IASB in promoting the consistent use and application of
sustainability standards. The IFRS Foundation has established expertise in
standard-setting which would benefit both the new ISSB and investors. This
would help investors to use sustainability reporting to inform their decisions by
giving them comparable and verifiable information.
The standards would benefit from the interconnectedness between financial
reporting and sustainability reporting. In addition, investors would benefit if a
single organisation developed requirements in financial reporting and
sustainability reporting. The IFRS Foundation is well positioned to develop an
appropriate institutional and governance framework. However, there is a risk of
reducing the current momentum created by other frameworks and standard
setting bodies. As an alternative, the IFRS Foundation could encourage
regulators to mandate the use of sustainability reporting standards globally. In
addition, it could be argued that the GRI standards already have created global
sustainability reporting standards that regulatory authorities could mandate.
Also, as the EU is already taking the lead in developing sustainability standards
and has a very ambitious timescale to develop and issue them, the IASB could
contribute its expertise in financial reporting to find consistency between
financial and sustainability reporting.
There is demand from investors for international coordination of an agreed set
of sustainability reporting standards. Currently, investors are often struggling
with incomplete and inconsistent data on companies. The ISSB would assist in
providing a level playing field for companies that prepare reports and also
international comparability for investors.

Fintram Global | Ph: +91 8882677955 | [Link]

Page 31 of 32
Changes to reporting
Sustainability reporting has been rising steadily up the accountancy agenda in
recent years, not least due to the efforts of ACCA and initiatives such as the ACCA
Sustainability Reporting Awards. At its broadest, sustainability reporting gives
stakeholders an understanding of an organisation’s role in – and contribution to
– society. A sustainability report considers the ways in which non-financial
issues, from customer service to climate change, contribute towards, or impact
on, value creation.
The way an organisation responds to these non-financial issues increasingly
determines good reputation, positive innovation, and, ultimately, profitability –
the reason why these issues are starting to influence reporting at all levels, not
just sustainability. The evidence for this is shown by the growing number of
sustainability parameters which are now becoming mandatory reporting
requirements – such as carbon emissions, for example, or corporate governance
issues. There is also a significant increase in voluntary reporting of sustainability
issues, and with a number of voluntary reporting tools and standards now
recognised globally, accounting standards bodies are starting to actively
participate in the debate. IFAC, for example, has issued a number of advisory
papers in this area, as well as appointing a Sustainability Experts Advisory Panel
that advises the IFAC leadership, Boards and other committees on sustainability
and environmental reporting.
Given the value that sustainability measures are now perceived to deliver, the
briefing paper’s authors have no doubt that existing ‘traditional’ financial and
business reports will soon converge with sustainability reports. This
convergence will result in radical changes to the reporting system, as financial
and non-financial information becomes increasingly integrated. These
developments may also result in a move to more concise, possibly more
frequent, and more targeted reporting; here, the emphasis will be on disclosure
rather than reporting, with information provided in different formats, tailored
to the audience for whom it is most relevant.

Fintram Global | Ph: +91 8882677955 | [Link]

Page 32 of 32